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risk management

I recently added both of the Latvian P2P platforms into my portfolio, and I’ve got some questions about my first thoughts so I thought I’d discuss a few things that have stood out to me within the first few weeks.

Loan terms

One of my key expectations for both portals was to have the ability to invest into short(er) term loans. Since my P2P investments in Estonian portals (Bondora, Omaraha, Moneyzen) are rather long deadlined (5 years), then for flexibility’s sake I wanted to invest into 1-6 month loans. This has proven to not be equally easy.

For Twino loan volumes aren’t an issue. Any money I transfer in gets invested momentarily, which is one of the reasons why I’ve added in money twice already. Currently the only problem with portfolio building is limiting your own enthusiasm towards transfering in money.

For Mintos, however, short term loans are in short supply. The first money I transferred in got invested within a few days, but since then it’s been problematic to see any short term loans. I attempted to lengthen the loan terms to 12 months, but that didn’t help much. This means that so far I haven’t added in any additional finances.

Automatic investing

Due to the simplicity of Twino’s product the autobidder is also phenomenally easy to use. I have to admit, they have made a good choice here – since your loans are buyback guaranteed than making automatic investing difficult in any way would be nonsensical. The money gets invested essentially the moment it’s transferred, so I hardly even log on, just glance at the daily reports in my mail.

For Mintos the autobidder to be honest is a bit painful to use. It’s both visually a bit clunky and some of the settings are problematic in terms of making sense. I get that this is an issue when you have multiple loan originators, but the bigger the market grows for them, the quicker they should work on making the autobidder smoother and more understandable at a glance.

Reliability

This is the question that everyone would like an answer to – who is more reliable of the two. I have no clue how exactly to check for this, but I suppose we should dig out the financial reports for both for Investeerimisraadio.

In terms of volume Mintos has clearly funded more lians (12M+), while Twino is at 6M+, one lists consumer loans and the other real estate backed loans and car backed loans as well, so the total amounts are clearly bound to be different.

I’d say if your tactic is long term investing then there probably isn’t much of a functional difference in the returns, but a slight difference in the experience. However, if you’re wishing for a short term investment that would be quicker to exit, then Twino is slightly in the lead for me at the moment.

So far my P2P investing has been limited to Estonian portals since I just didn’t need to expand into that many sites (you want to reach reasonable diversification before adding in other portals). However, since my portfolio is growing and there is only so much money I want to invest into Bondora and only so much I can invest into Omaraha (and the tiny amount that Moneyzen can provide), expanding became rather necessary. So, off to Latvia we go – Twino and Mintos.

Setting up the accounts

Honestly, the setup process for both was rather identical, just the document verification was in different order. I could make the accounts and start investing within the same day already. I created business accounts so I was happy that there wasn’t much hassle with the additional documentation. The bank transfers arrived the same day as well, so good for being very smooth. While I’m testing them I’m investing equal amounts into both, started off with 250€ each, and planning to increase at a similar rate.

Strategy

Now, this is where I’m planning to act a bit differently from my Estonian portfolios. I would rather not keep the loan terms super long, which means that for both of the portals I set the autobidders to bid for 1-3 month loans with only buyback guarantees. This means that in case of problems arising it’s reasonably easy to make an exit (hope I don’t have to regret saying this!)

Also, while I do have some concerns overall about buyback guarantees then if you look into the overall math of it, it’s somewhat reasonable on loans that are essentially payday loans. To benchmark – an Estonian payday loan company releases bonds every year for about 12% to collect investors’ money. What P2P investors are doing is essentially the same – with the process actually being cheaper for them due to less legal expenses. Of course there is always the risk of economic downturns and all other P2P related risks, but those can never be fully eliminated.

First thoughts of Mintos

Overall I’d say, firstly, that the process of registration was easy enough and most of the site is rather intuitive to use. With the notable exception of the portfolio manager that I think could use some work since firstly when activating it, I couldn’t figure out what was wrong, but apparently the LTV value is causing some issues? Also, hiding away the additional terms of things such as buyback seems rather counter intuitive and a waste of time to make people actually look for it. However, I’m looking forward to the first loans starting to make their rounds. While the buyback guarantee is good, then it activates rather slowly so it still causes cash drag, and the buybacks don’t all function as Twino’s – you don’t get to keep the interest (I’ll have to look into that a bit more, picking between the different loan originators seems like an intriguing task since they’re all foreign companies.) At this point however, Mintos has a longer history than Twino and people have had rather positive experiences with them. (The fact that they’re doing well is evidenced by the dropping interest rates as well.)

*Correction: seems like the buyback works with interest as well:

First thoughts of Twino

With Twino first impressions of usability are also rather good. I like the simple and logical design, the portfolio manager was very intuitive to use. However, at this point they are still very new, and despite the loan volumes they are showing it’s a typical reliability issue that new portals suffer from. Also, as with Mintos some of the countries they service might be of somewhat questionable value and economic sense, which is something that only time will probably tell. However, they are part of a large corporation (FinaBay), which would imply that if things started to go wrong, they would have to go very wrong for the mother company as well. In addition to this some people might find Twino morally objectionable due to the fact that you’re investing into payday loans, so that might be problematic for some. Overall, looking forward to how things get moving.

Time flies when you’re having fun, huh? My Bondora portfolio is now three years old, so I thought I’d take a quick look back and see what’s been happening and share a bit about my future plans when it comes to my private portfolio in Bondora.

Some quick stats to get started:

Total money invested: 5000€

Total interest earned: 2031€ (as of 30.12.15)

Current portfolio: 80% Estonian loans

Loans by rating: see below

So, the good, the bad and the ugly. Overall I am happy with how my Bondora portfolio has performed. I also took some time to calculate my returns, and this is the current standing for my own calculations for returns:

Option 1 (Super pessimistic)

Option 2 (Less pessimistic)

The pessimistic scenario looks rather pessimistic indeed, but don’t get stuck on those numbers. This is because it assumes no recovery for loans, but I can actually see recovery happening, so no need to panic. Overall in the long run the returns will be somewhere in the 12% range, it has balanced out more and more as time has gone on.

Future plans

I have completely stopped adding money into my private portfolio, and once new year starts I will start actually taking out money. There are several reasons for this. 1) I am building a second Bondora portfolio for my business account (going well so far, have given out my first 100 loans), 2) The tax hit is just getting too big (before, it balanced out with my mortgage tax return, but this year I’m actually paying additional tax), 3) Benefits of investing as a business – both in terms of accepting defaulted loans and postponing tax obligations.

So, as of today, I have set my bids to AA & A Estonian loans, however many there may be, and hope to transfer out the 5000 euros that I invested in the next two years. This money will be directed into stock investments, mostly into buying into index funds regularly, since stocks are the most reasonable investment for a private person in Estonia. I predict that my private portfolio will remain in the range of 3000€, and I’ll keep it slowly spinning to track how it does.

With the (arguably) impending crisis, many people have started to look into the risk levels of their investments with a bit more diligence. I asked Loit Linnupõld (Crowdestate) and Marek Pärtel (Estateguru) a few questions about how risk is managed in their investment portals.

How to assess the risk of crowd funding real estate?

The problem with many hybrid ways of investing is that evaluating the levels of risk associated with it becomes difficult due to how some risks may help balance out others while some may actually compound and create additional risk. Some things to keep in mind:

All real estate projects, crowd funded or no, follow the ups and downs of the market. If the market falls out from underneath you, then this will influence you whether you are in rental real estate, business real estate or crowd funding projects.

Crowd funding adds both a level of certainty (wisdom of the crowds) and a level of unreasonable enthusiasm (others are investing, so it must be good). You should still base your decisions on your own analysis, not on what others are doing.

(Real estate) crowd funding is still a new enough investment that we don’t have significant historical returns to base our thoughts on. Then again, past returns don’t predict future returns anyways. We can however ‘ballpark’ based on existing data in similar fields.

What do the portals do to manage risk?

I asked both Loit (CE) and Marek (EG) about how they manage risks, and how they hope to prevent problems from happening in their portfolios.

In case of a real estate crisis do you feel that crowd funding real estate & real estate loans are overall more or less risky to own than individual pieces of real estate? (Let’s assume a reasonably diversified portfolio).

Loit (CE): It really depends on a specific property, it’s cash flows and financial leverage. Technically, property is property regardless of whether it has been acquired directly or through crowdfunding. Nevertheless, I believe crowdfunding adds a new layer of common knowledge and if we combine that with crowdfunding platform’s due diligence (if they do it), that can significantly reduce the risk of picking wrong assets. Crowd is much smarter than any single individual alone and it is quite remarkable, that the wisdom can be shared and spread digitally between crowdfunders.

Marek (EG): To be prepared for a potential real-estate crises, smart investors should watch out not only for high returns but also for low and diversified risks. Every investment is a risk and once you accept this fact, then next thing that comes into play – it is how well you understand those risks and what measures you take to control them. One of the best things to control risks is diversification. Individual investors can’t typically buy several pieces of land or properties, to diversify their risks. If you bought a flat you still depend on developments in vicinity of your property. Its price may go down even without a crisis.

EstateGuru p2p lending platform gives you the possibility to significantly diversify your portfolio, splitting your money into smaller pieces between different types of loans (flip, bridge, buy to let, mezzanine, commercial, land, residential etc), in different locations by different borrowers and in the future also even in different countries.

One should understand the difference between investing in property crowdfunding (investment into equity and no security to investors given) and crowdlending platforms (investment secured by mortgage). We would suggest investors to do always their own stress tests- what happens to their investment if market goes down 20% (predicted m2 price of is not 2000 but 1600). In case of, say a 20% market decline, do investors earn some profit still, do they get back their invested money in some portion or lose it all- it largely depends on the capital structure of the project – what obligations the Borrower or Developer needs to fullfill before paying to platform investors.

Today we see clearly from UK, Europe and US statistics (altfi.com, Lendit.co) that institutional investors prefer lending platforms over crowdfunding ones as safer bet when making their capital allocations.

How has Crowdestate/Estateguru prepared for potential economic downturn scenarios? What kind of defences are in place to keep oversight of the projects and protect the investors’ money?

Marek (EG): First of all, all investments on EstateGuru platform are protected with 1st or in some cases 2nd charge mortgage. Not all Crowdfunding platforms have this security in the first place and with any fluctuations in Economy, their investors will be hit first. Smart looking business plans and fancy projects are not sufficient when property prices go down. But at EstateGuru we implemented second level protection – LTV at our projects is never higher than 75%, normally its around 60-69%, which means that even if property prices go down 25% we would still be able to recover our investors’ funds in case the borrower fails to repay the loan. In addition to the mortgage EstateGuru often asks the Borrower for a personal guarantee as extra security in order to make his EstateGuru loan repayment the top priority.In addition our partners have years of experience in Real Estate and we are able to foresee bad signs much in advance, so we will start working with Borrowers (refinancing, sale of assets etc.) much earlier to prevent Investors from litigation process and from potential partial loss.

Loit (CE): We continue to do our proper due diligence, picking only the best and business wise reasonable investment opportunities. Someone has pointed out, that most of the profits are earned at the moment of purchase and a our due diligence is focused on eliminating the odds of opening a bad project for crowdfunding.

As the real estate related bank lending becomes less and less available, there will probably be a decrease in new projects started and we might see some of its effects in next 12 – 18 months.

What is the absolute worst case scenario of what can happen to the projects in your portfolio?

Loit (CE): There are several absolute worst case scenarios, that might happen, and they all end up with real estate becoming worthless (Russian tanks invading Estonia) or completely illiquid (like in the end of 2008 to mid 2009, requiring the major global economic crisis hitting employment and income). Both scenarios might probably lead to partial or complete loss of the investment, depending on the specifics of the project (location, timing, leverage, demand etc). Its all about project’s cash flow – if you are able to generate cash either through even slow sales or leasing the property out, you will probably survive. Collateral is not the replacement of cash flow.

Marek (EG): A sharp decline in property prices (say 50%) lack of overall demand for property and in case of default longer than expected litigation time could be the worst case scenarios. Since our projects are diversified between residential and commercial, in different locations and are on top of that protected with 1st Charge Mortgage (this means our investors will have 1st claim on the money received from property sale) and LTV of no higher than 75 (currently average is 60% at EstateGuru) – we feel that all above mentioned measures make our investments one of the best protected on the market and give best risk/return ratio.

As you can see, both portals have given significant thought to what might happen in case of an economic downturn. I do agree fundamentally that a retail investor can never diversify to the extent that is possible with crowdfunding. However, it is important to keep in mind that you don’t stop analysing projects even while you are still diversifying – it’s better to not take in a bad project even when you aren’t really diversified yet.

In addition to that, I like that Loit also pointed out the wisdom of the crowd and Marek emphasised that all investors should stress test their own portfolios to make sure they are making correct investment decisions for their own risk levels.

There has been a significant amount of drama happening around Bondora this month.The new passive portfolio manager caused a fair bit of controversy and the API is still in testing so many investors have at least temporarily reduced investments. For me, the old PM is still active and can give out about 4K worth of loans, so I’m hoping that will tide me over until you can use the API to invest. This means that all the money I transferred into social lending this month went into Moneyzen and Estateguru. However, my Bondora portfolio is big enough that it just does its own thing even without adding in money.

Due to not adding much money into Bondora for the last couple of months, you can see the 60+ defaults becoming a more significant part of my portfolio. There are two reasons for this – firstly that the loans from the big growth months from last year are now defaulting, and the loan pieces that are defaulting at this point are starting to be the 15-25€ pieces as opposed to the 5€ pieces that used to default earlier. However, despite the continuously increasing defaults this was another record month for me in terms of interest earned:

Total interest earned for October ended up being 108,29€, meaning that this year is likely to end at 110€/month from Bondora, so I’m quite happy with the overall result already due to how much less I’ve invested into Bondora this year compared to what I had originally planned. Adding in Estateguru and Moneyzen, my P2P monthly earnings come just close to 125€.

I plan to add just a bit more money into Bondora this year to finish December with a total of 5K euros in deposits. My account will turn 3 years old in December and I guess I’ll have to write a longer overview into returns from Bondora and whether or not it’s been performing as I wished it to.

Another topic that’s starting to become more and more interesting as my portfolio ages is the recovery rate. I see pretty decent movement from recovery every month, and at this point I’m waiting for my monthly recovery to reach 20€/month. Should probably realistically happen mid-way through next spring. Recovery for last months looks like this:

Overall, I’d say, keep calm and wait for the API. I’ll probably be looking into it soon as well, once other third parties have made their solutions accessible. Overall, I was thinking about it a bit and I don’t even need anything super complex. I’d probably set my PM to just what I had now – AA, A, B &C loans OR any kind of Estonian loan. Not rocket science, so I’d assume that with the help of some friends working in IT it should be doable once more details about how the API works come apparent (like how exactly do the loans get distributed between bids!)